News in South Africa 31st August:
1. Rand falls after record budget deficit:
The rand dropped, underperforming most emerging-market peers, and yields on South African local-currency bonds rose after data showed the government ran a record budget deficit in July.
The rand weakened as much as 0.8% against the dollar after National Treasury figures showed that the budget moved to a deficit of R143.8 billion for the month, the largest since at least 2004 and wider than the R115.5 billion forecast by economists. There was a surplus of R36.7 billion in June.
Yields across the local-currency bond curve climbed, with rates on longer-dated securities rising more sharply. The yield on notes due December 2026 rose three basis points to 8.89%, while those on debt maturing in 2048 jumped nine basis points to 12.37%.
South Africa’s yield curve has been steepening as a slew of local risks fuel investor concerns that the government will have to ramp up bond issuance just as rising global yields draw capital away from emerging markets. Wednesday’s data is likely to compound these worries.
Speaking to lawmakers on Wednesday, South Africa’s central bank Governor Lesetja Kganyago said it was essential that the country reduced fiscal risks. In June, the bank expressed concern about a growing reluctance from local investors to continue absorbing government issuance.
Demand at Tuesday’s government bond auction was the lowest in nearly two years, based on data compiled by Bloomberg. Bidding was weakest for the longest-dated, 2048 notes.
2. Aarto heading to court:
The controversial Administrative Adjudication of Road Traffic Offences (Aarto) Act may be the subject of litigation again, this time for the reinstatement and enforcement of old fines that the Organisation Undoing Tax Abuse (Outa) and fines administrator Fines4U consider unlawful.
The Road Traffic Infringement Agency (RTIA) – tasked with implementing Aarto – however, denies any non-compliance with the act. It says: “The Aarto Act does not prescribe any time limit for the issuance of the enforcement orders.”
This comes barely a month after the Constitutional Court ruled the act was constitutional following an Outa challenge.
Aarto has been in operation in Johannesburg and Pretoria for over a decade, with the government failing to honour several target dates for countrywide implementation. The points demerit system, a crucial element of Aarto aimed at improving road safety by removing serial offenders from the road, has not been implemented anywhere yet.
Transport Minister Sindisiwe Chikunga has since announced that Aarto will be implemented countrywide on 1 July next year, presumably with the demerit points system.
There are other possible options for the motorist along the process.
Outa wrote to the RTIA early in July, stating it “trusts that the conversion of infringement notices to enforcement orders in the absence of due process is attributed to technical oversight and not malicious collection practices.”
The organisation gave the RTIA a few days to:
- “Cease to unlawfully issue enforcement orders and to comply with the requirements as set out in Section 20(2); and,
- Undo all the enforcement orders that were unlawfully issued.”
On 16 August, Fines4U sent an attorney’s letter to the RTIA on behalf of several clients pertaining to enforcement orders issued for more than 5 000 vehicles.
It referred to a previous court case Fines4U won against the RTIA about the same matter, where the court ruled the timelines provided for in the act peremptory. “Non-compliance therewith has the result that the total process is fatally flawed,” reads the letter.
According to the RTIA, “The Aarto Act does not prescribe any time limit for the issuance of the enforcement orders. The issuing authorities (municipalities) and RTIA, through existing processes, always endeavour to issue both the infringement notices and courtesy letters within the prescribed timeline.
“It is the RTIA[‘s] firm view that through prior served documentation in the form of infringement notices and courtesy letters, the infringer remains aware of the existence of the infringement.”
Instead of cancelling non-compliant notices, the RTIA advises “infringers who have been issued with enforcement orders that do not comply with legislated processes, to lodge revocation applications in order to overturn such enforcement orders. However, they still need to follow the prescribed process for lodging such applications.”
3. South Africa heading for debt trap:
South Africa is heading for a debt trap, with the government’s debt expected to continue its rapid increase and high interest rates making it increasingly difficult to finance its budget deficit.
Foord Asset Management investment executive Linda Eedes told Newzroom Afrika that the country cannot produce enough to repay its debt.
Eedes said it is normal for a government to borrow money to finance a budget deficit or spend on major infrastructure projects.
It becomes a problem when the budget deficit continues growing along with the debt burden built up to finance it.
Just ten years ago, South Africa’s debt equalled 30% of the country’s GDP. In 2023, the government’s debt now equals 73% of GDP or R5 trillion.
The country’s budget deficit continues to grow as the government spends significantly more than it collects through taxes.
This year, the budget deficit is set to reach 6% of GDP, more than the National Treasury expected in its February budget.
The government must borrow an estimated R500 billion a year – or R2 billion every working day – to finance this growing deficit and refinance maturing debt.
The only sustainable way out of this is economic growth, said Eedes. However, the country’s macroeconomic environment does not facilitate investment in the economy and thus inhibits growth.
The South African economy is not producing enough to pay back its debt. “It is getting into a bit of a debt trap,” said Eedes.
This is exacerbated by high interest rates, which make the government’s debt increasingly difficult to finance and repay. The government already spends 20% of all revenue on paying off its debt.
Despite the severity of the situation, Eedes does not think the situation will improve as the government is unwilling to take the actions needed to reduce its budget deficit and debt pile.
Current macroeconomic policies do not facilitate economic growth in South Africa, and it is politically unpalatable to cut spending before an election.
4. School fees above inflation increases:
School fee increases in South Africa have, on average, been roughly 2.6% above inflation every year since 2012 – mainly due to above-inflation teacher wage increases, municipal rates, and a growing number of parents unable to pay the fees, passing the buck onto those who can.
This is according to an economic bulletin published by the South African Reserve Bank (SARB).
The report showed that harsh economic conditions and a reduction in the educational budget had put pressure on paying parents, while the older age of the average teacher had bloated wages – resulting in school fee increases well above inflation over the past decade.
The report’s analysis focused on school fees at ordinary public schools, where more than 95% of South African learners are enrolled.
Education receives the biggest portion of the government’s consolidated budget, the only budget group still receiving more than debt-servicing – the fastest-growing budget area in the past decade.
Despite this, the amount allocated has decreased from 15.3% of the budget to 13.7% over the past eight years.
As a result, and despite this large allocation from the government, school fees are a vital necessity to supplementing state funding, the economists said, and school fee increases are used to soften various budgetary shortfalls.
Public schools in South Africa also apply an ability-to-pay principle, where state funding can favour schools in poorer areas while parents from affluent areas hold greater responsibility for school fees.
According to the report, School fee inflation has outstripped CPI inflation by between 1.5% and 4.4% since 2012. The only time CPI inflation exceeded school fee inflation was in 2021, after the peak of the Covid-19 pandemic – a period in which households’ ability to pay was severely depressed.
5. Ratepayers robbed by municipalities:
A 12-year study conducted by Prisma Contract Review Risk Management director Paul Nel shows that municipalities across the country underspent on services, overspent on wages, and ‘robbed’ billions through over inflation from ratepayers.
The report revealed that metro residents were charged R501.9 billion above CPI over the 12 years as expenditure and revenue grew by 200% compared to CPI of 96.52%.
The study estimates that the five biggest metros collectively overspent R137.3 billion on remuneration over the period, while, in contrast, they collectively underspent R86.4 billion on repairs and maintenance.
All information sourced from articles posted by: Fin24, Moneyweb, DailyInvestor, BusinessTech, and FinancialMail.
